Stay informed with free updates
Simply sign up to the Investments myFT Digest — delivered directly to your inbox.
Bottling and distribution may be the unglamorous side of the global drinks industry but they matter every bit as much as the ingredients, branding and manufacturing process.
The mundane business of getting your beverage into shops, vending machines, bars and restaurants across a range of geographies is crucial but challenging to get right and not necessarily what the manufacturers want to develop expertise in.
Often a separate company is used to take care of both bottling and the loading of crates into the back of trucks. Coca-Cola only supplies a concentrated syrup to its partners who then make, package and distribute the finished drinks. The scale of these outsourced operations can be glimpsed in the fact there are two Coca-Cola bottling partners listed in the FTSE 100, Coca-Cola HBC and Coca-Cola Europacific Partners.
Premium mixer and tonics business Fevertree takes this hands-off approach a step further by outsourcing all its manufacturing and delivery operations. Its main focus therefore is on sourcing and buying the high quality ingredients needed for its range of products, and developing new ones.
By giving US brewer Molson Coors manufacturing, marketing, and distribution rights in the US, it gained an injection of capital (Molson bought an 8.5 per cent stake in Fevertree), a share of the profits and a proven means to tap into a huge growth market. Molson in return gained a way to expand its portfolio and build a total beverage company catering for a much wider range of customers.
Diageo, owner of Guinness and Smirnoff, however values a degree of direct control and the drinks are all on it, at least in France following the company’s decision last year to take back distribution of its products from Moët Hennessy and to create a new subsidiary Diageo France.
BUY: Fevertree (FVER)
Shares in Fevertree were bubbling up after the premium mixer group flagged positive momentum in the US, along with market share gains in its European and rest-of-the-world locales. Trading in the domestic UK market was subdued by comparison.
Adjusted revenues edged up by 2 per cent to £172mn, while cash profits rose by 1 per cent to £18.4mn at constant currencies on a 20 basis point increase in the underlying margin.
Although on-trade sales in the UK have softened, possibly due to a fall in discretionary incomes, off-trade sales have been encouraging.
The full benefits from the production and distribution partnership signed earlier this year with Molson Coors have yet to become apparent, but it will almost certainly feed into the underlying momentum stateside.
The shares are by no means undervalued at 20 times cash profits to enterprise value, and on a price/earnings growth multiple of two times. But we think momentum will be maintained due to the Molson Coors deal.
HOLD: Knights Group (KGH)
Knights Group is making steady progress in fixing one of its biggest headaches: staff churn. Lawyer turnover has been a major drag on organic growth since the pandemic, alongside a weak mergers and acquisitions market. Yet headline numbers for the year to April looked healthy enough.
Revenue rose by 8 per cent to £162mn, with underlying pre-tax profit up 11 per cent to £28mn. Reported profits before tax went the other way, however, down 17 per cent to £12mn due to exceptional costs tied to acquisitions and restructurings.
Knights made two acquisitions during the year, including its largest yet, and has since added three more after the year-end. But strip those out and revenue slipped by £0.5mn due to downsizing in the restructuring and insolvency team, high churn earlier in the year and weakness in corporate law and private client work.
Still, the numbers appear to be heading in the right direction, with staff churn down to 10 per cent in the second half (compared with 15 per cent for the full year).
HOLD: S4 Capital (SFOR)
Some investors are running out of patience with S4 Capital (SFOR). Shares in Martin Sorrell’s digital marketing agency sank to a fresh low after it cut its revenue guidance yet again. Sales are now expected to fall by the mid-single digits this year, compared with earlier guidance of a low-single-digit drop. Keeping the target for flat earnings before interest, tax, depreciation and amortisation was little consolation.
Pressures are spread across the business. The company generates almost half of its revenue from tech clients, which are curbing marketing spending to plough cash into artificial intelligence projects. That means longer sales cycles and tighter spending.
First-half numbers showed the scale of the challenge. Net revenue in technology services fell 35 per cent on a like-for-like basis, while marketing services revenue dropped 6.3 per cent. The Americas, which accounts for nearly 80 per cent of total net revenue, was down 9.1 per cent. On a brighter note, cash generation was strong. Free cash flow rose from £3.1mn a year earlier to £16mn.
